Page 64 - The Economist20171214

64 Finance and economics The Economist December 16th 2017
2 December 5th, days after the Republicans’ added jobs aplenty. Though unemploy-
tax bill passed in the Senate, confidence In confidence 1 ment has fallen in 2017, working-age part-
among chiefexecutives reached its highest United States icipation has kept on rising.
level for nearly six years, says Business GDP Sceptics doubt whether participation is
Roundtable, a lobbygroup. The prospect of % increase on previous quarter, annualised tightly linked to the economic cycle. They
a big cut to corporate taxes (and, perhaps, 4 point out that some trends, such as falling
of deregulation) has boosted a stockmark- 3 participation amongworking-age men, are
et already on a long winning run. From the 2 very long-running. But participation is at
market trough in March 2009 to Mr least tricky to forecast. Its recent growth
1
Trump’selection, the S&P500 rose atan av- has defied official projections produced by
0
erage annual pace of16%. Since his victory, 2015 16 17 the Bureau ofLabourStatistics (BLS).
it has grown at a 22% annualised pace. Whether that continues will set the
A booming stockmarket pleases inves- Contributions to GDP growth economy’s speed limit. The Economist has
tors, but it poses another conundrum for Percentage points Gross investment calculated that, if participation in every
Consumption
the Fed. Some rate-setters worry that loose Government spending Net exports age and sex demographic group continues
monetary policy may inflate asset bub- 5 on its trend from the past year, the labour
bles. And soaring stocks have contributed 4 force will grow by around 135,000 workers
to a general loosening of financial condi- a month. At recent rates of job growth, un-
tions. The dollar is about 7% weaker, on a 3 employment would fall to 3.8% by the end
trade-weighted basis, than it was at the 2 of 2018. But should participation revert to
start of the year. Long-term bond yields 1 the long-term trend forecast by the BLS,
have also fallen slightly, having surged + 0 only86,000 newworkerswill appeareach
after the election. William Dudley, presi- 1 – month. Unemployment would fall much
dent of the New York Fed, has argued that fasternext year, to 3.4%.
looser financial conditions strengthen the 2015 16 17 2 The Fed’s rate rises will probably slow
case for interest-rate rises, because it is by Source: Bureau of Economic Analysis job growth before these hypothesescan be
influencing financial markets that mone- tested. Frustrated doves think the central
tary policy is supposed to work. According bank should probe the boundaries of the
to analysis by Goldman Sachs, financial the trick. In any case, notes Michael Pearce labour market, and not assume it knows
conditions have actually eased after every of Capital Economics, a consultancy, the them in advance. It risks denying workers
instance of Fed tightening since it started Fed’s surveys suggest the labour market is the first truly tight labour market in over a
raisingrates in December2015. not as tight as it was in, say, mid-2000, decade. Moreover, only if wage growth is
A crucial element is missing, however, when unemployment fell as low at 3.8%. allowed to rise will firms be pressed to in-
from the “overheating” analysis: inflation. Even in that expansion, underlying infla- vest more in labour-saving technology.
Since the spring, it has persistently fallen tion did not hit 2%. The boom ended not This could raise productivity growth, re-
short of expectations. Excluding food and because of an inflationary surge, but be- vealing more hidden capacity. (Rising in-
energy, prices in October were only 1.4% cause the dotcom bubble burst. vestment and a hint of a productivity re-
higher than a year earlier, by the Fed’s pre- Moreover, unemployment is not the bound this year suggest such a process
ferred measure. Wages, too, do not reflect only variable to watch. It does not count may be about to kick off.) And if the Fed
the apparent strength ofthe labour market those who are notlookingfora job. During tightenstoo quickly, sparkinga recession, it
(see chart 2). Though blue-collar and ser- and after the crisis, Americans left the may be hard to reverse course, since inter-
vice workers are seeing higher pay rises— workforce in droves. But since late 2015 the est rates cannot fall farbefore hitting zero.
the wagesand salariesofproduction work- labour-force participation of working-age As evidence that rate-setters are fretting
ers grew at a 3.8% annualised pace in the people, especiallywomen, hasbeen rising. needlessly about inflation, doves point to
third quarter of the year—professionals For much of 2016, this trend kept unem- the bond market. That long-term bond
have seen their pay growth slow. Overall, ployment fairly flat even as the economy yields have fallen even as the Fed has
wages are rising by about 2.5%, no faster raised rates suggests investors think the
than two years ago. riskofinflation is shrinking. Ms Yellen’s re-
One reason is the time it takes for low Not as tight as it looks 2 tort is that inflation expectations, as mea-
unemployment to translate into inflation. United States sured by surveys, have held steady this
In the meantime, one-off factors can dis- Unemployment rate, % year. That suggests something else could
tort the data. Ms Yellen points to price cuts 10 be pushingbond yields around.
for mobile-phone contracts at the start of 8 Soon a new Fed chairman will be con-
the year. These should soon drop outof the fronting these puzzles. Jerome Powell is to
6
numbers. Others blame the “Amazon ef- succeed Ms Yellen in February. Mr Powell,
4
fect”—brutal price wars among retailers. 2 who has served as a Fed governor since
Perhaps, too, the Phillips curve—the rela- 0 2012, has broadly supported Ms Yellen’s
tionship between inflation and unemploy- 2007 09 11 13 15 17 strategy ofgradual rises in interest rates. In
ment—is jagged, and inflation will sudden- a confirmation hearing before a Senate
% increase on a year earlier
ly spike once joblessness falls too low. panel on November 28th, he seemed, if
Or perhaps the labour market is not as Average hourly earnings* 4 anything, a little more doveish, acknowl-
hot as the Fed thinks. Estimates of the so 3 edging that low labour-force participation
called “natural” rate of unemployment— 2 among working-age men might indicate
the rate consistent with no upward or 1 remainingslackin the labourmarket.
downward pressure on inflation—are no- Core inflation † 0 Yet the Fed committee is turning over
toriously unreliable. Rate-setters have 2007 09 11 13 15 17 rapidly, and Mr Powell may find himself
gradually revised theirs down, from over Sources: Bureau of *Total private † Personal surrounded by hawks. An example is Mar-
5% at the end of 2013 to 4.6% today. Persis- Economic Analysis; consumption expenditure, vin Goodfriend, whom Mr Trump has
tent low inflation may force them to repeat Bureau of Labour Statistics excluding food and energy nominated to fill one vacant seat. Mr 1